Bison Financial Group principal, David Repka, was recently interviewed by a national commercial real estate publication to discuss his views on where the Manufactured Housing Market is headed in 2021....
Q: What are your predictions for manufactured housing community (MHC) lending going forward?
A: Manufactured housing communities in all their iterations are the belle of the ball. Whether they are single-wide trailer parks from the 1940s or 1950s, mobile home parks of the 1960s or 1970s, or manufactured housing communities built from the 1980s onward they share one common feature: logical, predicable, durable cash flows. Residents rent the lots from the landlord and expect a level of services and amenities commensurate with their rent. On the low end of the spectrum MHCs provide low-cost housing for the least affluent members of a community. At the upper end of the spectrum MHCs offer amenities similar to a four or five-star luxury resort. The cash flows to the landlord are “sticky” because residents buy their own dwelling unit investing from $5,000 on the low end to $2 million or more to live in the community. Rents can be annually raised at or above the level of inflation. These homes are far from mobile often being attached to a permanent foundation. Residents are unlikely to incur a multi-thousand dollar expense to move and will continue to pay ever increasing lot rent. Capital will continue to flow into this sector as confidence in office, retail and hospitality real estate fades. Capital will continue to dive into the space for one simple reason: housing demand continues to grow.
Q: What will be the biggest changes/trends in MHC lending this year versus years past? What will be the biggest changes because of the pandemic?
A: Tenant demand for reasonably priced “attainable housing” has skyrocketed. Attainable housing is the new buzzword for housing that in another generation was called “affordable”. The largest lenders that previously focused on luxury rental multifamily housing are being encouraged to provide loans to investors that provide “mission rich housing” to an “at risk population”. This is a polite way to say that mobile home parks offer the most affordable alternative to folks on a limited budget or fixed income. Lot rents in a MHC often start at $300 to $500 per month or one-third to one-quarter the cost of a similarly sized rental apartment.
Q: How will underwriting change on these deals going forward?
A: A lender’s number one concern is understanding rent collection trends. The global pandemic crept into underwriting in March 2020. Lenders vigilantly compared rent collections to previous years and previous months. Lenders want to make sure that the landlords are collecting 96-98% of available rents, rather than only being able to collect a fraction of their rent roll. Lenders are now taking a deeper look into the tenant profile of a community. Lenders wanted to know that the tenants had dependable jobs that will continue to provide the landlord their recurring, durable cash flow. An overabundance of tenants in the hospitality industry could be a problem as that industry has been devastated by COVID-19.
Q: What type of MHC properties/deals will lenders target this year? Why?
A: Top 100 MSAs in a blend of primary, secondary, and tertiary markets. The sweet spot is “attainable housing” sometimes called “mission based housing” or “workforce housing” that provides safe, clean, affordable housing for its residents. Lenders that previously only provided capital for owners of top tier four or five star parks with double-wide manufactured homes have shown a willingness to lend on two and three star parks with older, single-wide homes.
Q: What will be the typical leverage on these deals?
A: Up to 75% LTV for a cash-out refinance of stabilized properties. For acquisitions of transitional assets requiring renovations up to 85% LTC is possible with a high-octane stretch-senior loan or senior loan plus mezz/pref.
Q: What will be the typical interest rates on these deals?
A: Stabilized properties will be financed at a fixed rate in the mid to upper 2% range depending on leverage and if the asset qualifies as “mission rich housing”. Risk-based pricing applies: best rates for lower leverage and high debt coverage. Oftentimes full-term interest-only can be negotiated with no requirement to amortize down principal. Transitional properties will have rates in the mid single digits depending on leverage.
Q: What will be the typical DSC? Debt yield?
A: DSC 1.2 to 1.25 on stabilized properties. Transitional properties being purchased by experienced Sponsors can attract lenders at a break-even or even under-water debt coverage.
Q: What specific markets will see the most MHC lending going forward? What markets will lenders shy away from?
A: Hottest markets will be the smile states with a focus on Florida, Texas, and Arizona. Over 900 people a day are moving to Florida. There will be continued flight from cold, dreary, dense, urban markets to sunny, suburban spots with no state income tax.
Q: What will lenders require from the sponsor? (certain net worth, liquidity, recourse, experience, etc.)?
A: During the go-go lending days of the past, the borrower’s credit profile was less important, their job was to fog a mirror. Lenders are now taking a deeper dive on the financial capabilities and operational track record of their borrowers, and how they operated during the pandemic. Did the borrower default on debt? Did the borrower apply for forbearance on any of their properties? Lenders will want the borrower to have a net worth of at least 50% of the loan amount. Lenders will require post-closing liquidity for at least 10% of the loan amount. The ideal borrower will have 6 to 12 months of post-closing cash reserves to pay debt service on their portfolio if there is another Covid-19 problem that impairs cash flow and their tenants' ability to pay rent. Some lenders will require an escrow for up to one year of PITI+CapEx Reserves.
Q: What specific lenders will be the most active in MHC lending going forward?
A: Agency lenders that offer Fannie, Freddie, and FHA. For loans that don’t qualify for Agency financing, CMBS lenders love the predictability of cash flows generated from MHCs.
Q: What will it take to get bank financing in today’s market?
A: There are very few national bank lenders in this space. Bison assists our clients in finding a local lender in the local market. Community banks and credit unions that know the market, the barriers to entry, and the local trends are fiercely competitive in this space. Community banks are focused on lending to Sponsors that they know, like, and trust. Their go/no go decision is often influenced by understanding the borrower’s global cash flow from their day job as well as their investment activities. These lenders typically will require full personal recourse and require a much shorter amortization period than the non-bank lenders. Non-Bank lenders and small insurance companies can also compete because they don’t have compensating balance requirements and lending limits to one borrower. Often non-recourse terms are available at 60% leverage or less.